Brazil: inflation nutters

Inflation nutters

Mervyn King, the former Governor of the Bank of England, referred to those central banks who focused solely on inflation targeting as "inflation nutters". They should take other things into account: growth, employment and so on. The central bank of Brazil, after its recent 100 basis point interest rate increase – to 12.25% - with, apparently two more same-sized increases planned looks definitely in the inflation nutter camp.

Brazil’s central bank was made independent as recently as February 2021. It set a great example to other economies in raising interest rates early: it started in March 2021, a year before the US Fed. By the time Brazilian consumer price inflation peaked at over 12% in April 2022, the policy interest rate had reached 11.75% and went even higher (see chart).

By January 2024, inflation was (just) inside the target range (3% +/- 1.5%). The first cut in interest rates had already been made and interest rates fell to 10.5% in December.

Now, it seems, those rate reductions will be more than fully reversed.  The forward guidance given by the central bank implies rates will hit 14.25%.

Nervousness about inflation is understandable. As recently as the 1990s, Brazil had two episodes of hyperinflation (over 5,000% p.a., a rate of 8% per day).

But, most likely, the latest and planned increase in interest rates is overkill.

The IMF’s latest forecast sees inflation dropping to 3.6% in 2025; the OECD and most private forecasts are slightly less sanguine. And core inflation is running at 4.0% year-on-year. But does bringing inflation back within target (that is, under 4.5%) really need 14.25% interest rates?  I doubt it.